Chapter 13 Statement of Cash Flows

ANSWERS TO QUESTIONS

1. The income statement reports revenues earned and expenses incurred during a period of time. It is prepared on an accrual basis. The balance sheet reports the assets, liabilities, and equity of a business at a point in time. The statement of cash flows reports cash receipts and cash payments of a business, from three broad categories of business activities: operating, investing, and financing.

2. The statement of cash flows reports cash receipts and cash payments from three broad categories of business activities: operating, investing, and financing. While the income statement reports operating activities, it reports them on the accrual basis: revenues when earned, and expenses when incurred, regardless of the timing of the cash received or paid. The statement of cash flows reports the cash flows arising from operating activities. The balance sheet reports assets, liabilities, and equity at a point in time. The statement of cash flows and related schedules indirectly report changes in the balance sheet by reporting operating, investing, and financing activities during a period of time, which caused changes in the balance sheet from one period to the next. In this way, the statement of cash flows reports information to link together the financial statements from one period to the next, by explaining the changes in cash and other balance sheet accounts, while summarizing the information into operating, investing, and financing activities.

3. Cash equivalents are short-term, highly liquid investments that are purchased within three months of the maturity date. The statement of cash flows does not separately report the details of purchases and sales of cash equivalents because these transactions affect only the composition of total cash and cash equivalents. The statement of cash flows reports the change in total cash and cash equivalents from one period to the next.

4. The major categories of business activities reported on the statement of cash flows are operating, investing, and financing activities. Operating activities of a business arise from the production and sale of goods and/or services. Investing activities arise from acquiring and disposing of property, plant, and equipment and investments. Financing activities arise from transactions with investors and creditors.

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5. Cash inflows from operating activities include cash sales, collections on accounts, and notes receivable arising from sales, dividends on investments, and interest on loans to others and investments. Cash outflows from operating activities include payments to suppliers and employees, and payments for operating expenses, taxes, and interest.

6. Depreciation expense is added to net income to adjust for the effects of a noncash expense that was deducted in determining net income. It does not involve an inflow of cash.

7. Cash expenditures for purchases and salaries are not reported on the statement of cash flows, indirect method, because that method does not report cash inflows and outflows for each operating activity. Rather, it reports only net income, changes in accounts payable and wages payable, and net cash flow from operating activities.

8. The $50,000 increase in inventory must be used in the statement of cash flows calculations because it increases the outflow of cash all other things equal. It is used as follows:

Direct method—added to cost of goods sold, accrual basis (the other adjustment would involve accounts payable) to compute cost of goods sold, cash basis.

Indirect method—subtracted from net income as a reconciling item to obtain cash flows from operating activities.

9. The two methods of reporting cash flows from operating activities are the direct method and the indirect method. The direct method reports the gross amounts of cash receipts and cash payments arising from the revenues and expenses reported on the income statement. The indirect method reports the net amount of cash provided or used by operating activities, by reporting the adjustments to net income for the net effects of noncash revenues and expenses, and changes in accruals and deferrals. The two approaches differ in the way they report cash flows from operating activities, but net cash provided by operating activities is the same amount.

10. Cash inflows from investing activities include cash received from sale of operational assets, sale of investments, maturity value of bond investments, and principal collections on notes receivable. Cash outflows from investing activities include cash payments to purchase property, plant, and equipment and investments, and to make loans.

11. Cash inflows from financing activities include cash received from issuing stock, the sale of treasury stock, and borrowings. Cash outflows from financing activities include cash payments for dividends, the purchase of treasury stock, and principal payments on borrowing.

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12. Noncash investing and financing activities are activities that would normally be classified as investing or financing activities, except no cash was received or paid. Examples of noncash investing and financing include the purchase of assets by issuing stock or bonds, the repayment of loans using noncash assets, and the conversion of bonds into stock. Noncash investing and financing activities are not reported in the statement of cash flows, because there was no cash received or cash paid; however, the activities are disclosed in a separate schedule.

13. When equipment is sold, it is considered an investing activity, and any cash received is reported as a cash inflow from investing activities. When using the indirect method, the gain on sale of equipment must be reported as a deduction from net income, because the gain was included in net income, but did not provide any cash from operating activities. When using the indirect method, the loss on sale of equipment is added to net income because the loss was included in net income but did not require an operating cash outflow.

ANSWERS TO MULTIPLE CHOICE

1. d) 2. d) 3. a) 4. a) 5. a) 6. b) 7. d) 8. a) 9. d) 10. c)

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EXERCISES E13–1.

F 1. Dividends paid F 2. Repayments of long-term debt O 3. Depreciation and amortization F 4. Proceeds from issuance of common stock to employees O 5. [Change in] Accounts payable and accrued expenses

NA 6. Cash collections from customers F 7. Net repayments of notes payable to banks O 8. Net income I 9. Payments to acquire property and equipmentO 10. [Change in] Inventory

E13–4.

1.

NE

Inventory Accounts payable

2. – NCFO Prepaid expenses (rent)

Cash 3. NE Plant and equipment

Note payable

4.

NE

Expense Prepaid expense

5. – NCFO Income tax expense

Cash 13-4

6. – NCFI Investment securities

Cash 7. + NCFF Cash

Common stock Additional paid-in capital

8. + NCFO Cash Accounts receivable

9. + NCFI Cash Plant and equipment (net)

10. + NCFF Cash Long-term debt

E13–6.

Cash flows from operating activities—indirect method Net income .............................................................................................. $12,625 Depreciation expense.............................................................................. 8,500 Accounts receivable decrease ($10,500 – $12,000) ............................... 1,500 Inventory increase ($14,000 – $8,000) ................................................... (6,000)Salaries payable increase ($1,750 – $800) ............................................ 950

Net cash provided by operating activities........................................... $17,575

E13–10. Account Change

Receivables Increase Inventories Increase Other current assets Increase Payables Increase

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E13–11. Account Change

Accounts receivable Increase Inventories Decrease Other current assets Increase Accounts payable Increase Deferred revenue Increase Other current liabilities Decrease E13–16.

DEEP WATERS COMPANY Statement of Cash Flows

For the Year Ended December 31, 2012

Cash flows from operating activities: Net income ..................................................................... $ 300 Adjustments to reconcile net income to net cash

provided by operating activities: Increase in accounts receivable .................................... (100) Increase in prepaid expenses ....................................... (50) Decrease in wages payable .......................................... (650)

Net cash provided by (used for) operating activities.. (500) Cash flows from investing activities:

Cash paid for equipment (400) Net cash provided by (used for) investing activities .. (400) Cash flows from financing activities:

Cash proceeds from issuing stock.................................. 600 Net cash provided by financing activities ................... 600

Net increase (decrease) in cash during the year .................. (300) Cash balance, January 1, 2012 ............................................ 4,000 Cash balance, December 31, 2012 ...................................... $3,700

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PROBLEMS

P13–1.

Req.1

Related Cash Flow Section Δ in Cash

O O I

O

O

O F F

O,F

Balance sheet at December 31 2012 2011Cash $68,250 $63,500

Accounts receivable 15,250 22,250 Merchandise inventory 22,250 18,000 Property and equipment 209,250 150,000 Less: Accumulated depreciation (59,000) (45,750)

$256,000 $208,000

Accounts payable $9,000 $19,000 Wages payable 4,000 1,200 Note payable, long-term 59,500 71,000 Contributed capital 98,500 65,900 Retained earnings 85,000 50,900 $256,000 $208,000

Change +4,750 -7,000 +4,250

+59,250

-13,250

-10,000 +2,800

-11,500 +32,600 +34,100

10

3

4

7

2

5

6

8

9

1

Net increase in cash Add to net income the decrease in A/R Subtract from net income the increase in Inventory Payment in cash for equipment Add to NI because depreciation expense does not affect cash

Subtract from net income the decrease in Accounts Payable Add to net income the increase in Wages payable Cash used for repayment of note principal Issuance of stock for cash Increased for net income amount of $46,750 Decreased for dividends declared & paid $12,650

Income statement for 2012 Sales $195,000 Cost of goods sold 92,000 Depreciation expense 13,250 Other expenses 43,000 Net Income $46,750

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HiDef Films, Inc. Statement of Cash Flows

For the Year Ended December 31, 2012

Cash flows from operating activities: Net income $46,750 1

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense $13,250 2

Decrease in accounts receivable 7,000 3

Increase in merchandise inventory (4,250) 4

Decrease in accounts payable (10,000) 5

Increase in wages payable 2,800 6 8,800 Net cash provided by operating activities 55,550 Cash flows from investing activities:

Cash payments to purchase fixed assets (59,250) 7

Cash flows from financing activities: Cash payments on long-term note (11,500) 8

Cash payments for dividends (12,650) 1

Cash receipts from issuing stock 32,600 9

Net cash provided by financing activities 8,450 Net increase in cash during the year 4,750 10

Cash balance, January 1, 2012 63,500 Cash balance, December 31, 2012 $68,250

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Req. 2

An overall increase in cash of $4,750 came from inflows of $55,550 from operating activities and a stock issuance of $32,600. A large percentage of the cash inflows were invested in equipment ($59,250), with $11,500 used to pay down long-term financing and $12,650 for dividends.

P13–2. Req. 1

Related Cash Balance sheet at December 31 Flow

Section 2013 2012 Change Δ in Cash Cash $37,000 $29,000 +8,000 10 Net increase in cash

O Accounts receivable 32,000 28,000 +4,000 3 Subtract from net income the increase in A/R O Merchandise inventory 41,000 38,000 +3,000 4 Subtract from net income the increase in Inventory I Property and equipment 132,000 111,000 +21,000 7 Payment in cash for equipment

O Less: Accumulated depreciation (41,000) (36,000) -5,000 2 Add back to NI because depreciation expense does

not affect cash

$201,000 $170,000

O Accounts payable $36,000 $27,000 +9,000 5 Add to net income the increase in Accounts Payable

O Accrued wage expense 1,200 1,400 -200 6 Subtract from net income the decrease in accrued wage expense

F Note payable, long-term 38,000 44,000 -6,000 8 Cash used for repayment of note principal F Contributed capital 88,600 72,600 +16,000 9 Issuance of stock for cash

O,F Retained earnings 37,200 25,000 +12,200 1 Increased for net income amount $201,000 $170,000

Income statement for 2013 Sales $120,000

Cost of goods sold 70,000 Other expenses 37,800 Net Income $12,200

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P13–2. (continued)

BG Wholesalers Statement of Cash Flows

For the Year Ended December 31, 2013

Cash flows from operating activities: Net income $12,200 1

Adjustments to reconcile net income to net cash provided by operating activities:

Decrease in accrued expenses (200) 6 6,800

Net cash provided by operating activities 19,000

Depreciation expense $ 5,000 2

Increase in accounts receivable (4,000) 3

Increase in merchandise inventory (3,000) 4

Increase in accounts payable 9,000 5

Cash flows from investing activities: Cash payments to purchase fixed assets (21,000) 7

Cash flows from financing activities: Cash payments on long-term note (6,000) 8

Net cash provided by financing activities 10,000

Cash balance, January 1, 2013 29,000

Cash balance, December 31, 2013 $37,000

Cash receipts from issuing stock 16,000 9

Net increase in cash during the year 8,000 10

Req. 2

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There was an increase in cash for BG Wholesalers this year of $8,000. Operating activities provided a positive cash flow of $19,000. This inflow of cash from operating activities, combined with the stock issuance for $16,000 cash, allowed the company to invest $21,000 in fixed assets and pay down a long-term note by $6,000.

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